Chapter II...2. Educate yourself. Understand your rights, and your options. You may want to consult an attorney. 3. Find allies. You may need support, and be able to learn from others’

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© 2005, by the Oil & Gas Accountability Project. First printing 2004. Second edition printed July 2005. All rights reserved. Brief excerpts may be reprinted for review purposes.

Chapter IILegal and Regulatory Issues

OIL & GAS ACCOUNTABILITY PROJECT

Oil and Gas at Your Door?A Landowner’s Guide to Oil and Gas DevelopmentSecond Edition

Chapter IILegal and Regulatory Issues

WHO OWNS THE MINERALS BENEATH YOUR LAND?In some cases the surface and minerals (including oil and gas) are owned by the same person,but often the minerals are owned separately from the surface property.

MINERAL VERSUS SURFACE RIGHTSMineral owners have different rights than owners of the surface lands. This section outlinessome of the unique rights granted to mineral owners, as well as information on surface ownerrights and protections.

REGULATIONS AND SURFACE OWNER PROTECTIONSThis section provides examples of state, county and federal statutes (i.e., laws) and regulationsthat provide some protection to surface owners, e.g., consultation requirements, compensationfor surface damage, reclamation of disturbed lands, and more.

In many regions of the United States landowners are being approached by companies who wantto search for oil and gas beneath their land. This can be an extremely stressful, confusing timefor landowners. The companies have done this many times before, and understand what theirlegal rights are. But most landowners are not aware of what they can demand of companies inreturn.

Too many landowners have signed away certain rights to companies, only later to find out thatthey didn’t have to do so. Or they have agreed to offers, only to find that their neighbors havereceived a better deal.

What are the first steps a landowner should take?1. Most importantly, don’t panic, and don’t rush into any agreements.

2. Educate yourself. Understand your rights, and your options. You may want to consult anattorney.

3. Find allies. You may need support, and be able to learn from others’ experiences.

4. Find out who owns the minerals beneath your land. In some cases, the surface and theminerals are owned by the same person, but often the minerals are owned separatelyfrom the surface property. Landowners will have different rights and different negotiationstrategies depending upon whether the mineral rights belong to them; to federal, state ortribal governments; or to other private parties (e.g., citizens or companies).

This chapter is designed to provide a general introduction to the legal and regulatory issuesrelated to oil and gas development. It is important to have some understanding of governmentregulations and laws pertaining to oil and gas. These may provide you with important tools forensuring that oil and gas development will have as minimal an impact as possible on your prop-erty and lives. The following pages discuss various legal and regulatory options; and providesome strategies for dealing with oil and gas development whether or not you own the mineralsbeneath your land.

Bear in mind that the laws and regulations that govern oil and gas development vary from state-to-state. So you will likely need to do some additional research, or contact local organizations,

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II

other landowners or attorneys who may be more familiar with your state’s oil and gas laws.And please note that while some recommendations and suggestions are made in the followingtext, this does not constitute legal advice. Competent legal advice can only be provided whenthe lawyer has heard all of the factual information pertaining to your particular situation.

The Legal Steps in Oil and Gas DevelopmentIn the first chapter, you learned about the technical aspects of oil and gas development. Butbefore any of that can take place, a company must ensure that they have the legal right to devel-op the oil and gas. The following provides you with an understanding of the legal steps taken bycompanies to secure those rights.

1. Mineral ownership is determined.

Oil and gas companies usually hire people to research mineral titles, in order to determinewho owns the minerals that they want to develop. In some cases, this work involvesresearching land and mineral deeds that date back to the 1800s.

2. Mineral owners are contacted by the company.

Once mineral ownership is determined, the mineral owners will be approached by thecompany. The initial contact may be made by a phone call, a letter, or a home visit froman oil or gas company employee or representative (could be a leasing agent or a landman). At this time, the company will explain its desire to explore for and possibly developthe mineral estate for oil and gas. (Unless the surface owner also owns the minerals, heor she will not be contacted at this stage.)

3. Negotiations begin on the purchase or leasing of mineral rights.

The company will attempt to negotiate an agreement to lease or buy the mineral rights.Negotiations may include issues such as: royalties; water use; compensation for damagesto property; and other considerations. If successfully negotiated, leases can be used toprotect the surface property. The company requires the lease in order to proceed with theirdevelopment plans, as the lease transfers the right to explore for and develop mineralsfrom the mineral owner to the company. (See Chapter III for Tips on Leasing YourMinerals.)

4. Company may contact the surface owner (if different from mineral owner).

In many cases, when companies are ready to explore, they are legally required to informsurface owners that they have leased the mineral rights and intend to search for and pos-sibly develop the oil and gas under the surface owner’s property. Surface Use Agreements(contracts) or less formal agreements may be negotiated with the surface owners at thisstage. (See Chapter III Tips on Surface Use Agreements.)

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Legal and Regulatory Issues

In many states theowners of the landare not the ownersof the minerals.

Who Owns the Minerals Beneath Your Land?

It is important for landowners to have an understanding of some key legal terms and conceptsrelated to oil and gas development, such as the difference between surface and subsurface rights.

Oil, gas and minerals, like land, are considered forms of property. The mineral resources that arebeneath a tract of land (i.e., the mineral estate or subsurface estate) can be owned, and owner-ship provides you with the mineral rights or subsurface rights. Surface rights, on the other hand,refer to ownership of land (i.e., the surface estate) and the right to use the surface, e.g., fordwellings, agriculture, or urban development.

SPLIT OR SEVERED ESTATE PROPERTY

In many states, the owners of the land are not necessarily the owners of the minerals. Whenthe surface and subsurface estates are owned by different parties, they are referred to as splitestate or severed estate lands.

When you buy a piece of land, it is not always evident whether or not you own the minerals,because mineral estate owners do not have to inform a new surface owner that the mineralrights have been severed. There are ways of finding out whether or not the minerals and landare split estates. These are discussed later in the chapter.

All western states and most other states allow for the separate ownership of land and mineralresources. Some states have more split estate lands than others. It has been estimated that:

• In Texas, for 90% of the property owned, the surface landowner is not the owner of theland’s mineral rights.363

• If you’re buying land in Colorado, 85% of the time the land purchase will not include themineral rights beneath that land.364

• In Kansas, the landowner usually owns the subsurface rights, too.365

In Louisiana, the owner of the land does not “own” the oil and gas, but “has the exclusive rightto explore and develop his property for the production of such minerals.”366 Louisiana landown-ers may convey, reserve, or lease their right to explore and develop their land for production ofminerals. This right to explore and develop reverts back to the landowner if no exploration orproduction occurs within ten years (or within a timeframe prescribed in the lease or contract).367

How are Mineral Rights Severed from Surface Rights?The separation of surface and subsurface rights occurs through: 1) a mineral deed, or 2) min-eral reservation.

1. Severance by mineral deed occurs when someone who owns both the surface and min-eral rights chooses to sell all or a portion of the mineral rights to another party. Anotherscenario is when the owner of both the surface and mineral rights sells the land to oneparty and the minerals to a different party.368 In either case, the proof of the sale is knownas a mineral deed, which is recorded in government land title offices (most often with thecounty governments).

2. Severance by mineral reservation may occur if a party owning both surface and mineral rightssells the land, but retains (or reserves) all or a portion of the mineral rights. All the mineralowner has to do to preserve title to the subsurface estate is record his or her mineral reserva-tion with the county clerk and recorder’s office or other government land title office.369

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WHO OWNS THE MINERALS

BENEATH YOUR LAND?

Mineral reservation has been widely practiced by individuals, land-grant railroads, lendinginstitutions, and federal and state governments. For example, one of the largest privatemineral owners in Montana is Ag America. That company acquired its minerals throughmortgage foreclosures on ranches during the 1930s and 1940s. When the company soldthe land, it would reserve half of the minerals.370 Mineral reservations also often occurredwhen lands were originally patented (i.e., the federal government sold the land but held onto the mineral rights).

Other Split Estate Considerations

• The mineral estate, like the surface property, can be subdivided. The mineral rights canbe split so that there may be numerous parties who own a portion of the minerals beneathyour land.

• Mineral rights can be divided by specific mineral commodities. For example, one compa-ny can own the mineral rights to coal, while another company owns the oil and gasrights.371 Consequently, it is important to know which minerals are included in a mineraldeed. Some deeds specify that “all minerals” are included. Others use the phrase “oil andgas,” which means that only the rights to develop oil and gas are included in that deed.The general rule is that unless specifically defined, the term “mineral” refers to oil, gas,coal, metals and precious or semi-precious stones.372

• In some states, there is a third estate that can be severed. In Pennsylvania, a state rich incoal resources, there are three separate estates: the surface estate, the mineral estate and the support estate. If the surface owner also owns the support estate, the mineralowner may mine the coal but must leave enough of it there to support the surface estate,i.e., if the mineral owner mines too much coal, and the surface owner’s house falls intothe mine, the surface owner’s rights have been violated. If, on the other hand, the miner-al owner also owns the support estate, the surface owner has no legal right to have his orher property supported by anything.373

• Who owns coalbed methane? For the past 50 years, when the mineral rights to the gasand coal beneath a tract of land have been owned by different parties, disagreementshave occurred over who owns the coalbed methane.374 In some states, such asPennsylvania, Alabama, and Montana,courts have ruled that coalbedmethane is part of the coal formationin which it is found.375 In 1999, how-ever, the U.S. Supreme Court ruledthat coal, as defined in the 1909 and1910 Coal Lands Acts, does notinclude the methane gas found withinthe formation, and therefore, a coalowner has no right to extract coalbedmethane for profit.376

• Who owns the groundwater rights?Water quality and quantity issuescould become important dependingon who owns the rights to the ground-water, there may be an opportunity for landowners to influence the development of oil orgas on their property. In some states, the groundwater belongs to the state (i.e., it’s a pub-lic resource), and so companies must apply for permits to extract and remove the ground-water that accompanies oil and gas development. In other states, however, the ground-water rights belong to the surface owner.

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RECONNECTING THE SURFACE AND MINERAL ESTATES

In some states, mineral rights revert to the surface owner under certain conditions such asdeath, failure to obtain production, or passage of a specified period of time. It is important tobe aware that these types of laws may exist in your state, and they may provide surface ownerswith the opportunity to take possession of the mineral rights beneath their land. Several stateshave laws to this effect.

• In Louisiana, if the minerals are not used (e.g., no exploration or production has occurred)within 10 years, the surface owner becomes the owner of the minerals.377

• In North Dakota and Ohio, if minerals have lain dormant for 20 years the surface ownercan claim them.378

• In Michigan, a law that passed in 1998 provides landowners with the opportunity to peti-tion the state to purchase the state-owned minerals beneath their land. They can do thisonly if there is no pending lease or development. Upon request from surface owners, thestate must sell the minerals to them at fair market value, unless the state wants to reserveminerals to prevent damage in environmentally sensitive areas, or there is some otherlegitimate reason to keep the minerals in state ownership. A deed restriction then will beadded to the property that prohibits the minerals from being severed in the future.379

• Recent attempts to pass similar laws in Colorado and Montana have failed.

HOW TO DETERMINE OWNERSHIP

If a landowner is unsure of whether or not he or she owns the mineral estate, it is a questionthat should be answered, especially if the land is owned or leased in a region with oil and gasdevelopment.

• If you own the minerals beneath your land, you have considerable opportunity to benefitfrom and influence the course of oil and gas development.

• If you do not own the minerals beneath your land, that means that other people or entitiespossess certain rights that may hinder your ability to shape oil and gas development onyour property.

There are a number of methods for determining who owns the oil and gas beneath your land.

1. Read your property deed and research the land title records.If you want to find out who owns the minerals beneath your land the first step is to find the deedto your property. The deed may state that ownership of your property is fee simple absolute.This may mean that you own both the surface property and the underground mineral resources.

If you can’t find your copy of your deed, contact your county government. Surface deeds arealmost always recorded in the county government’s Recorder of Deeds (or some equiva-lent) office in the county where the property is located.

It may be necessary to search the property’s historical deeds all the way back to the 1800s.(Be aware that older mineral deeds may not be recorded in any government office.) Aphrase in an old deed such as “oil and gas excepted and reserved” means that the surfacewas sold separately from the oil and gas estate at that time. If you find such a statementin an old deed, the oil and gas is probably not yours to lease or develop.380

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WHO OWNS THE MINERALS

BENEATH YOUR LAND?

2. Research mineral deeds, grants and reservations. Go to the county and federal government offices to find out if there are mineral deeds,grants or reservations related to your property. You will need a legal description of your land(this can be found in your deed or in the title document for your land).

The federal Bureau of Land Management maintains Surface and Mineral Land Statusmaps, which can be purchased for a nominal fee. These maps are color-coded to show own-ership status (i.e., federal, state or private ownership), but the maps do not show privateland owner names.

Depending upon where you live, there will be different county officials (e.g., countyrecorders, register of deeds, county clerk) charged with recording mineral, oil and gas trans-action documents such as mineral deeds. To obtain addresses and phone numbers for theappropriate office, contact your county government, or visit the web site: http://royalty-deeds.com/courthouses/.

Some county assessor offices track minerals because they are taxed at the county level ifthey are producing (or they are taxed if non-producing but severed from the surface). Youshould contact your assessor’s office to determine if they track mineral ownership.

3. Have a title search conducted by a land title/abstract or title insurance company. There are two main types of companies that provide information on property ownership:one that will create an abstract of title, and a second that provides title insurance. In bothcases, these companies can research the legal history of property and perform extensivesearches of public records including deeds, mortgages, contracts, civil court records, pro-bate court records, federal court records, and tax records. They may be able to assist you,if your own search attempts have not provided you with adequate information.

When you purchased your property, you may have hired a company to provide you with titleinsurance to prove that you had clear title to the land. In Colorado, title insurance compa-nies are now required by law to inform the title insurance purchaser if the mineral estatehas been either leased or severed from the surface estate. The title companies must alsoinform the purchaser that there is a substantial likelihood that a third party holds some orall interest in oil, gas, other minerals, or geothermal energy in the property; and that suchmineral estate may include the right to enter and use the property without the surfaceowner’s permission.381

For residents of other states, be aware that title searches may not include information onwhether or not you own the minerals. In many states, it is common for title companies toexclude research on mineral rights, mining claims, water rights, and other issues of con-cern. If you have already done a title search for your property, refer to the exclusion sectionof the title policy. If mineral rights are mentioned as exclusions, then it is unlikely that thisdocument will provide you with the information you need.

Make sure you find a company that will (and knows how to) include mineral rights in a titlesearch. Not all title companies have personnel trained in examining mineral ownership, soit is important to ask if they are qualified to examine this type of property. The companiesshould also be willing to “stand behind” their findings. Having a title company insure a min-eral title examination may be difficult, however, so find out in advance whether or not thecompany is willing to provide insurance. Alternatively, you can ask for a mineral guaran-tee, which will disclose any mineral reservations found in the “chain of title” (i.e., the list ofall people/entities who have held title to the property) since the land was first patented. Asmentioned above, a mineral reservation indicates that the ownership of the minerals hasbeen severed from ownership of the land. The interpretation of the mineral report, howev-

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er, can be complicated. Usually, if you order a mineral guarantee report from a title/abstractcompany, you will need to take that information to an attorney who can provide you with anopinion based on the findings in the report. If you get mineral title insurance, you do notnormally need to get the legal opinion.

Be aware that title searches can be expensive. One Montana titles searcher quoted his hourlyfee for producing a mineral report at $126.382 And there may be attorney fees on top of that.

4. You may want to consider hiring a landman. While landmen typically work for oil and gas companies, determining mineral ownership isa large component of their work, and experienced landmen should have significant expert-ise in determining mineral ownership. Also, landmen may be more affordable than titlecompanies, but unlike title companies they may not be able to guarantee their findings.

5. Find out if the minerals have been dormant, and for how long. As mentioned above, several states have laws that allow surface owners to claim mineralsbeneath their lands if those minerals have been dormant for a certain period of time. Theremay be other states that also have similar laws. Again, you will want to consult an attorneyto determine whether the dormant minerals now belong to you, or what steps you need totake to re-claim these rights.

Mineral Versus Surface Rights

If someone owns or leases the mineral rights to oil and gas beneath your land, he or she hasthe right to enter your property and search for minerals; and, if minerals are discovered, theowner then has the right to remove those minerals.

Depending upon the state that you live in, some or all of the following “rights” may be included in the search for and removal of minerals:

• the right to enter upon the surface for exploration and production of oil and gas

• the right to conduct geophysical exploration and seismic tests on the surface

• the right to mine caliche (dirt, gravel, etc.) for constructing roads, drill pads, etc. from thepremises

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MINERAL VS SURFACE RIGHTS

The Rights

“In Manistee County, the Michigan Departmentof Environmental Quality (DEQ) has alloweddrilling in residential areas of natural gas wellsthat contain high concentrations of hydrogen sul-fide, a poisonous chemical. DEQ officials defendtheir action on the basis that the rights of miner-al and lease holders “must be respected.” Ineffect, they appear to be determining that thedrillers’ rights are more important than the rightsof residents.”

— Schneider, Keith.383

• the right to construct roads to drill sites (including cutting and removing timber); and to con-struct, maintain and use roads, bridges, canals and other passageways necessary to trans-port materials, workers and equipment to and from well sites and associated facilities

• the right to take a reasonable amount of water (fresh or saline, found above or below thesurface) for development and production of oil and gas

• the right to dispose of fresh or salt water, which is produced with oil and gas, on premises

• the right to house employees on the premises

• the right to construct or install production and storage facilities, storage tanks, pits, struc-tures, machinery and other appliances

• the right to select drilling sites

• the right to select timing of drilling operations

• the right to install and use pipelines to transport hydrocarbons and waste products topoints within or off the leased premises

• the right to enter premises despite the existence of growing crops

It is common to hear of the mineral estate as being “dominant” to the surface estate, becausethe owner of the mineral estate has the right to access and develop his or her minerals, evenif those actions infringe upon the surface owner’s property and life. And in many instances, min-eral owners do not have to compensate the surface owners for use of their property.

To many people, the dominance of the mineral estate seems unfair. In the United States, the U.S.Constitution guarantees that private property cannot be taken for public purposes without justcompensation.384 For example, if private property is acquired by the U.S. government (e.g., tocreate a national park), the surface and mineral owners are compensated. Yet private propertycan be used and damaged by oil and gas development without just compensation for the sur-face owner - meanwhile, there are huge profits being generated by the oil and gas industry.

SURFACE OWNER RIGHTS AND PROTECTIONS

Surface owners are not without rights. There are rights and protections stemming from legaldecisions and government laws and regulations. Also, surface owners have access to the courtsystem if laws and regulations are not enforced, or if negligence on the part of the oil and gascompany has damaged their property. In addition, some oil and gas companies will negotiatesurface use and/or surface damage agreements with surface owners, including offers for com-pensation, although they may not be required by law to do so.

Legal DecisionsOver time, the courts in a number of states have recognized that surface owners do have somerights when it comes to mineral development. The following rules related to surface owner pro-tections have become commonly accepted:385

1. Mineral owners may be held responsible for creating a nuisance, depending upon thedefinition of nuisance in the state where the land is located.

2. Mineral owners may be liable for damages if they fail to reasonably accommodate thesurface uses.

• In Gerrity Oil and Gas Corp. v. Magness, the Colorado Supreme Court decided thatthere is a ‘due regard’ responsibility, which “requires mineral rights holders to accom-modate surface owners to the fullest extent possible consistent with their right todevelop the mineral estate.” 386 The practical application of this ruling is still beingworked out.

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• In the case of Getty Oil Company v. Jones, the Supreme Court of Texas required thatGetty Oil bury its oil pumping units in cellars so that Jones, a farmer, could operate hisautomatic mobile irrigation system unimpeded (the height of the pump prevented fullrotation of the irrigation system). This case demonstrates that even though the miner-al owner may use the surface to the extent that is reasonably necessary, he or she maynot interfere with the surface owner’s use of the surface if there are reasonable alter-natives available to the mineral owner (e.g., in the case of Getty Oil, the company hadthe alternative of burying the pumping units).387

3. Mineral owners may be liable for damages to the surface if unreasonable or negligentuse occurs, or if the mineral owner violates a contractual obligation. It is, however, thelandowner’s responsibility to prove damages in a court of law.

There have been a variety of court cases that have found unreasonable surface use by anoil and gas operator in a variety of circumstances:388

• Use of an excessive amount of surface. In Texas, an oil and gas operator used sixacres more than was reasonably necessary, and had to pay the surface owner for thevalue of the use of those six acres;389 in Alaska a mineral lessee was liable for exces-sive use for clearing a helicopter landing field 50-feet wider, and using 50% moretrees, than was reasonably necessary;390 in Utah, the construction of a road interferedwith the landowner’s irrigation system and disturbed more than six acres of the sur-face owner’s land. The court held that this was not reasonably necessary, especiallysince the mineral lessee ignored the surface owner’s request to build the access roadfrom a different direction so that damage to the surface owner’s property would beminimized.391

• Use of surface for an excessive length of time.392

• Use of fresh water for secondary recovery operations when other solid, liquid orgaseous substances are available that are technically and economically feasible foruse; or excessive use of water.

• Use of obstructing equipment (see Getty Oil Co. vs. Jones, above).

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MINERAL VS SURFACE RIGHTS

FIGURE II-1. LOW PROFILE WELL HEADThis allows irrigation machinery to operate unimpeded.

Surface Use AgreementsSome states have laws requiring companies to attempt to negotiate surface use or surfacedamage agreements with the surface owner. These laws are discussed below. In states wheresuch agreements are not required by law, many companies still attempt to negotiate with splitestate surface owners on issues such as access and compensation for damages.

These agreements are not reviewed by a government agency. They are contractual agreementsbetween the company and the surface owner.

Negotiations with surface owners may include a discussion of:

• what compensation will be paid, and the timing and method of that compensation;

• the extent or nature of the property interest needed for oil or gas development;

• the quality, location or size of property needed for development;

• management of improvements and personal property during development;

• the date of proposed entry and issues related to use of the property; and

• any other terms and conditions deemed appropriate by either party.

See Chapter III for more information on Surface Use Agreements.

Regulations and Surface Owner Protections

Depending on whether or not minerals are privately owned, or owned by state or federal gov-ernments, different regulations apply.

If the minerals are privately owned, e.g., you own the minerals and lease them to a mining com-pany, that company will be subject to state laws, and possibly county or municipal laws. Also,the company will be required to honor any contractual agreements made with you, the mineralowner. The most common of these agreements is a mineral lease. If you own the mineral andthe surface rights, the mineral lease can be negotiated to protect your surface. See Chapter IIIfor more information on leasing your minerals.

The oil and gas industry is regulated primarily at the state level. Generally, no matter whetherthe state, the federal government or a private party owns the minerals, operators must adhereto state laws and regulations governing oil and gas development.393 Depending upon the state,the laws may be more or less protective of surface rights than federal, county or municipal lawsand regulations.

The authority of government agencies to oversee oil and gas development is established instatutes, which are laws established when an act is passed by a state or federal legislature ormunicipal council. Some state legislatures have passed statutes solely devoted to oil and gas,while others have passed statutes, e.g., environmental or natural resources statutes, whichcontain small sections that pertain to oil and gas. At the local or municipal level, statutes areusually called “ordinances.”

Regulations are rules and administrative codes issued by governmental agencies at all levels(municipal, county, state and federal). Although they are not laws, regulations are adoptedunder authority granted by statutes, and therefore they have the force of law. Regulations tendto provide much more detail on a particular subject than do their corresponding statutes, andoften include penalties for violations.

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To find out which statutes and regulations apply to oil and gas in your state, contact the gov-ernment agencies listed in Chapter V. For a list of federal statutes that apply to oil and gas, seethe publication Preserving Our Public Lands (to obtain a copy, see Chapter V).

The following sections provide examples of various state, federal and county or municipalstatutes and regulations that provide some protections for surface owners.

Before reading about the potential regulatory protections for surface owners, it is important tonote that even though there are statutes and regulations on the books, it does not guaranteethat these protections will occur. Companies may fail to follow the laws, and their infractions maygo unnoticed by the government enforcement agencies. Or governments may turn a blind eyewhen companies break the law — either for political reasons, or because the agencies do nothave the staff to properly enforce the laws. Therefore, it is important for landowners to learn asmuch as they can about the laws and regulations governing oil and gas in their region. If landown-ers see that laws are being broken, they can pressure government agencies to enforce the laws.

STATE REGULATIONS

The oil and gas industry is regulated primarily at the state level. Whether the state, the federalgovernment or a private party owns the minerals, generally the mineral operator must adhereto state laws and regulations governing oil and gas development.394

Most states have agencies with the specific mandate to oversee oil and gas development. Forexample, many states have oil and gas commissions, which are empowered by the state gov-ernment to regulate the industry. Also, natural resources or environmental quality departmentsmay have the ability to regulate certain aspects of the oil and gas industry, such as discharge ofwastes. (A table of state regulatory agencies and contact information can be found in Chapter V.)

The following section provides information on how various states treat some issues that are ofconcern to surface owners. Selected examples are given of state regulations and requirements.It is not possible to include all regulations for all states in this guide. The purpose of the exam-ples is to provide the reader with an idea of the way in which different states regulate oil andgas development.

LeasingThe direct notification of individual surface owners typically does not occur when leasing ofstate or federal minerals occurs. Consequently, surface owners often do not realize that themineral rights have been leased to a company that may develop oil and gas on their land. Somestates do have processes for posting notices about lease sales on state lands. For example, thestate agency in Montana will post notices on its web site, in local newspapers and they will sendinformation about leases to a mailing list.395

The Interstate Oil and Gas Compact Commission has produced a table that summarizes stateoil and gas leasing information, including how the state agencies notify the public about leasesales. This table is available at: http://www.iogcc.state.ok.us/STATELANDLEASINGINFO.htm

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REGULATIONS AND SURFACE

OWNER PROTECTIONS

Even thoughthere are laws or regulations on thebooks, it does notguarantee thatthese protectionswill occur.

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Shortage of State and Federal Oil and Gas Inspectors

A 2004 review of inspection and enforcement programs in five western states found thatalthough the number of active oil and gas wells in those states increased by 14% between 2000and 2004, the number of state oil and gas inspectors generally did not increase. On the feder-al level, Bureau of Land Management (BLM) field office inspectors conducted 33% fewerinspections in 2003 than they did in 1999. The chart below shows the average number of activewells per state and federal inspectors for the year 2003. From the chart, it is clear that in mostjurisdictions inspectors cannot possibly have time to inspect all active wells every year – giventhe fact that each inspection involves driving to the well site, conducting the inspection, andperforming any necessary paperwork and follow-up. Although state agencies have fewerinspectors relative to the number of active wells than the BLM, state inspectors conduct sig-nificantly more field inspections than their federal counterparts. State agencies inspect activewells once every 1-3 years, while BLM field office staff inspect active wells every 2-10 years(and inspect active wells for environmental compliance once every 4-5 years).

The above information comes from a report entitled Law and Order in the Oil and Gas Fields – A Reviewof Inspection and Enforcement in Five Western States. It was produced by the Western Organization ofResource Councils in November, 2004.396

Number of Active Wells Per Federal BLM Inspector (2003)

3310

1378

3247

296

4323

305

509

970

143

214

216

Colorado

Montana

New Mexico

North Dakota

Wyoming

Grand Junction, CO

Miles City, MT

Farmington, NM

Dickinson, ND

Buffalo, WY

Pinedale, WY

Number of Active Wells Per State Agency Inspector (2003)

ExplorationBefore a company can enter a surface owner’s property for exploration purposes, it may berequired to obtain an exploration permit from the state and notify surface owners that explo-ration is going to take place on their property. Permission, however, is not usually required fromthe surface owner.

Drilling and ProductionSurface Owner Permission and NotificationIn most states, surface owner permission to conduct oil and gas operations is not required.Louisiana and West Virginia, however, do require landowner permission before oil and gasdevelopment may occur.398

Even though permission from the surface owner to develop oil and gas is not required in moststates, companies typically do have to notify surface owners about a proposed development orapplication for a permit to drill.

Once notified of a company’s intention to drill, it is important to realize that surface owners gen-erally have a time frame during which they may object to the company’s application to drill. Also,if a landowner fails to receive notice during the time frame specified by the government, then theoperator has no right to begin drilling operations. In the event that drilling begins without notifi-cation, landowners are encouraged to contact the appropriate government agency. If you do notknow which agency is responsible for hearing complaints, simply contact any department thatdeals with oil and gas issues. They should be able to direct you to the appropriate state office.

Consultation and “Good Faith” NegotiationsIn some states, there are regulations that require companies to consult with surface ownersregarding the location of wells, roads and other items that will affect the surface owner’s abili-ty to use his or her property.

In Colorado, for example, an operator is required to make a good-faith consultation with surfaceowners regarding well locations and access roads. The operator must ask the surface owner ifhe or she wants to be consulted about the timing of the operations and the location of the wellsite and access road, as well as final reclamation activities. The operator is required to providethe surface owner with a description or diagram of the proposed drilling location, dimensionsof the well site, and if known, the location of associated production or injection facilities,pipelines, roads, and any other areas to be used for oil and gas operations. If there is a surface

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OWNER PROTECTIONS

FIGURE II-2. SELECTED STATES’ EXPLORATION REQUIREMENTS397

tenant, however, the operator has no obligation to consult with them unless the surface ownerappoints the tenant for consultation.400

Similarly, in Illinois, operators must make an offer to discuss access, placements of roads, con-struction and placement of pits, restoration of fences, use of surface waters, removal of treesand surface water drainage changes caused by drilling operations.401 Once discussions are con-ducted, there is nothing that obligates a company to accommodate the surface owner’s con-cerns. There is, however, a provision for surface owner compensation that acts as an incentivefor companies to limit the damages done to the surface estate. Otherwise, the company maybe taken to court by the surface owner (and if the surface owner’s case is successful, the com-pany pays for attorney fees).402

In Wyoming, if the negotiations with surface owners are unsuccessful, a company wanting todevelop coalbed methane (CBM) may go to state court to try to get “right of access” to the sur-face owner’s property—this could include access to the wells, roads, reservoirs, pumping sta-tions and other facilities. In order for a company to obtain court-ordered access over the sur-face to develop the CBM, the operator must prove that it made “reasonable and diligent efforts”

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FIGURE II-3. SELECTED STATES’ NOTIFICATION REQUIREMENTS399

to acquire access through good-faith negotiations. At a later time, the court will hold a trial todetermine the appropriate damages to be paid to the surface owner. Many of the disputes aresettled before the cases go to court.403

Conversely, in Montana, there is no requirement for companies who hold valid mineral leasesto consult with surface owners about the placement of roads, drill sites, power lines, contain-ment ponds, or other activities that will affect their land.404

In states that have a requirement to consult and negotiate “in good faith,” it is often unclearwhat is meant by “good faith.” A company’s definition may differ significantly from that of thesurface owner. In Chapter IV, the landowner story “Company’s threat to bond-and-drill is notnegotiating in good faith” addresses this issue.

Compensation for Surface DamagesAt least nine states have adopted surface damage compensation provisions as part of theirstate laws.405 In these statutes, oil and gas companies typically are required to attempt to nego-tiate damage settlements with surface owners before beginning operations. In most of thestates, if the developer and surface owner cannot reach an agreement, the company has theright to proceed with development. The surface owner then has the opportunity to pursue com-pensation for damages through the court system. One notable exception is in Oklahoma, whereno drilling may occur until a surface use agreement is reached or a petition is made to the courtto appoint appraisers to assess surface damages. Any operator who willfully and knowingly failsto notify the surface owner prior to entering his or her land, or fails to come to an agreementand does not ask the court for appraisers, shall pay, at the direction of the court, treble dam-ages to the surface owner.406

Most surface damage statutes truly give oil and gas operators an incentive to minimize surfacedamages, since the operators will bear the costs of any damage, not simply “unreasonable”damages (which are often difficult for surface owners to prove). In many of the state statuteslisted on the following page, there is a provision for “loss of land value.” For surface owners, thisis preferable to the federal damage provisions, which only apply to damages to crops and tan-gible improvements.

In 2005, Surface Owner Protection bills were proposed in four western states: Colorado,Montana, New Mexico and Wyoming. Only Wyoming’s bill passed. For more information onSurface Owner Protection bills and legislation, contact OGAP.

Site ReclamationSite reclamation of abandoned oil and gas wells is required by allstates, although there are some differences in regulations. Allstates have specific requirements for the plugging of wells to pro-tect groundwater, coal, gas, oil, or other natural resources. Thedefinition of acceptable surface reclamation varies from “as nearas practical to pre-operation conditions” to detailed requirementsfor land restoration, including the replacement of site topsoil.

By and large, states do not simply assume that companies aregoing to plug wells and reclaim well sites. Most states requirecompanies to provide financial assurance (e.g., post a bond)before a well is drilled. This ensures that at the end of the well’slife, if companies do not have the financial ability to plug andreclaim well sites, some funds are available to enable the stateto do the work.


OWNER PROTECTIONS

FIGURE II-4. THIS IS RECLAMATION?Jonah Natural Gas Field, Wyoming, 2003. Photo by Linda Baker.

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II-16


FIGURE II-5.SELECTED STATESWITH SURFACEDAMAGECOMPENSATIONREQUIREMENTSOR LAWS.407

Financial Assurance (Bonds)Typically, if oil and gas operators walk away from their operations (e.g., by declaring bankrupt-cy), the management of these orphan sites falls to the state or federal governments. Nearly allstates require that companies post a bond or another form of financial assurance with the stateto cover the costs related to plugging and abandonment of wells. These funds are collected toprovide the state with some “insurance,” in the event that a company is no longer willing or ableto perform the plugging and restoration. The funds are released back to a company if it prop-erly plugs and abandons its well. Proper abandonment typically includes the restoration of sur-face lands.408

Well depth and geographic location are two factors that play into the amount of financial assur-ance that state agencies require for plugging and restoration of individual wells. The amountvaries with well depth in fourteen states (Alabama, Arizona, California, Illinois, Kansas,Kentucky, Michigan, Mississippi, Missouri, Montana, New Mexico, New York, Utah andWyoming).410 Geographical differences in financial assurance are evident by comparing bondamounts in Kentucky and Alaska. In Kentucky a single bond for a well 500 feet deep or less is$500, while the minimum per well amount in Alaska is $100,000. This may reflect the highercosts of reclaiming Alaskan well sites.

In most states, companies are allowed to post state-wide or blanket financial assurances withthe state government. These blanket bonds are supposed to demonstrate a company’s finan-cial capability of plugging and restoring all of its wells in that state. The states vary greatly onthe amount of financial assurance required in a blanket bond. The amounts range from as low

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OWNER PROTECTIONS

State Financial Assurance Per Well State-wide Blanket Bond

Alaska $100,000 $200,000

California $15,000 (wells < 5,000’ deep)$20,000 (wells 5,000 – 10,000’) $30,000 (wells > 10,000’)

$100,000 (50 or fewer onshore wells) $250,000 (more than 50 onshore wells) $1 million (all onshore and offshore wells)

Colorado $5,000 $30,000 (less than 100 wells)$100,000 (more than 100 wells)

Illinois $1,500 (well < 2,000’ deep) $3,000 (well = or > 2,000’ deep)

$25,000 for up to 25 wells $50,000 for up to 50 wells $100,000 for all wells in state

Kansas

$50 refundable fee (if operator has an acceptable record of compliance) $0.75 per foot drilled (for all the operator’s wells)

$5,000 (1-5 wells that are <2,000’ deep ; this increases to $20,000 for 25 or more wells at this depth) $10,000 (1-5 wells that are >2,000’; this increases to $30,000 for 25 or more wells)

Kentucky$500 (wells = or < 500’ deep) $5,000 (wells > 4,000’ deep)

$10,000

Montana $1,500 (well < 2,000’ deep) $5,000 (2,000’ – 3,500’ deep)$10,000 (3,501’ or deeper)

$50,000

New Mexico$5,000 - $7,500 (well < 5,000’ deep) $7,500 - $10,000 (5,000’ – 10,000’ deep) $10,000 – $12,500 (well > 10,000’ deep)

$50,000

Ohio $5,000 $15,000

Oklahoma None. $25,000 OR financial statement showing operator net worth of at least $50,000

Pennsylvania $2,500 (this amount may be adjusted everytwo years; different rules apply for wells drilled prior to 1985)

$25,000 (this amount may be adjusted every two years; different rules apply for wells drilled prior to 1985)

Wyoming $10,000 (wells < 2,000’ deep)$20,000 (wells > 2,000’ deep)

$75,000 for all wells < 2.000’ deep

FIGURE II-6. VARIATIONS IN FINANCIAL ASSURANCE REQUIREMENTS FOR PLUGGING AND SITE RESTORATION. 409

as $5,000 in Kansas to as high as $1 million in California.

A recent study indicates that the costs of plugging and reclaiming a single orphaned well site inthe western states can range from $19,000 to $75,000.411 Based on these numbers, it appearsthat in most states financial assurance bonds are inadequate to cover the costs of properlyplugging and restoring well sites.

A striking example of the inadequacy of bond amounts comes from Wyoming. In 2001, thestate of Wyoming and the federal Bureau of Land Management (BLM) were left with an esti-mated $4 million in liability to plug and reclaim 120 wells abandoned by Emerald Restoration& Production. The government collected $125,000 in bonds from the company, which wenttoward plugging 56 wells on private land. The state Oil and Gas Commission used $2 millionfrom the state’s Conservation Fund to meet plugging costs that the bond did not cover. Thereare still more than 60 of Emerald’s wells on federal and state lands yet to be plugged.412

According to industry statistics, approximately 2 % of the three million wells (i.e., 60,000 wells)that have been drilled in the United States are considered orphaned.414 As already mentioned,it can cost between $19,000 and $75,000 to properly plug and abandon a single orphan well.That means that at the present time $1.1 billion to $4.5 billion of taxpayers’ money will have tobe spent to properly plug and abandon all of the orphan wells in the U.S.415

In some situations it can cost far more than $75,000 to properly plug and abandon a singleorphan well. To date, the Colorado Oil and Gas Conservation Commission (COGCC) has spentmore than $400,000 trying to plug an orphan gas well in La Plata County, Colorado.Unfortunately, COGCC’s efforts have not been successful, and the failure to plug the well hashad near tragic consequences.

On February 12, 2005, Charles Yoakum turned on his stove. All four walls of his trailer blewapart and the roof blew into the air. An orphan gas well, located about 250 feet fromYoakum’s trailer, is the likely source of methane that fueled the --.416 The orphan well hasa long history of leaking methane and fouling the groundwater in the Bondad area of LaPlata County. In 1994, the Colorado Oil and Gas Conservation Commission (COGCC) spent

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The cost of plugging and

reclaiming a singleorphaned well site

in the westernstates can rangefrom $19,000 to

$75,000.

Status of wells drilled in the U.S. since states began regulating oil and gas

Plugged or Abandoned53%

Idle10%

Converted to Underground Injection

Control Well4%

Orphan2%

Currently Producing/Enhanced

Recovery31%

Total: 3 million wells.

FIGURE II-7. STATUS OF THE THREE MILLION WELLS drilled in the U.S. since states began regulating oil and gas.

Source: Produce or Plug: A Summary of Idle and Orphan Well Statistics and Regulatory Approaches. 413

$200,000 trying to plug the well. After the explosion, the COGCC pledged to spend$200,000 more to identify the exact location of the well and of another orphan well in thearea, and identify any abandoned pipelines, utility corridors, or other potential conduits forgas migration. 417

Clearly, if states do not have enough money to put toward plugging all orphan wells, the wellscan become environmental problems and present health hazards to nearby residents. (See boxentitled “Bankrupt Companies Walk Away from Oil Wells in Texas.”) It is important, therefore,for surface owners to: 1) encourage governments to require adequate bonds, and/or 2) includea financial security provisions in Surface Use Agreements. With these measures in place, therewill be some assurance that companies —not the surface owners or the public— will bear thecost of adequately plugging and cleaning up well sites.

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OWNER PROTECTIONS

FIGURE II-8. REMAINS OF A TRAILER IN LA PLATA COUNTY, CO. The trailer exploded due to methane that

most likely came from an inadequately plugged orphan well. Photo Credit: Yodit Gidey, Durango Herald.

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Legal and Regulatory Issues REGULATIONS AND SURFACE

OWNER PROTECTIONS

Bankrupt Companies Walk Away from Oil Wells in Texas

In 1996, the Ginco Operating Company walked away from more than 500wells in Texas, when the company filed for bankruptcy. At that time, thestate held less than four thousand dollars in financial assurance from thecompany. The maximum the state could have required was a $250,000blanket bond. By 1999, the agency responsible for the orphan sites, theTexas Railroad Commission (TRC), had spent more than $500,000 plug-ging and reclaiming some of Ginco’s wells, with hundreds more yet to beplugged.

The Ginco case was by no means an isolated one. As of 2002, the state has17,000 orphan wells to plug, at a cost that the state estimates at $4,500 perwell.418 The reality is that the state does not collect enough money in bondsand other forms of financial security to cover the cost of plugging wells ifcompanies walk away. In 1997 alone, the TRC Oil Field Cleanup Programspent $12.7 million to plug and reclaim wells, and was reimbursed only$82,691 by operators - about 65 cents for every $100 spent, according tostate records.419

An article in the San Antonio Express newspaper relates the story of alandowner affected by the Ginco bankruptcy.420 By the time Ginco boughtthe wells on Milton Brehm’s property, most of the oil had been removed.According to Brehm, the wells “just weren’t producing that much no moreand they didn’t take care of them. . . They let them run down.”

Before Ginco declared bankruptcy, its workers removed the pump jacksand ripped out hundreds of feet of tubing. Eventually, a slow trickle of oilbegan flowing out of the well and onto the ground. According to Brehm,the oil “would run into the creeks and that would worry the RailroadCommission.” The Texas Railroad Commission, the state agency responsi-ble for the wells, plugged the wells in 1996.

Even though the wells are plugged, Brehm is left with areas in his wheatfields where nothing will grow. These areas are often referred to as “killzones,” and are found around many leaking wells. As well, a tank battery,a number of 55-gallon drums and a large 200-barrel storage tank remain onhis property.

“Why is the landowner responsible for all this stuff after they run off andleave it?” Brehm asked.

Note: As of 1999, the TRC has been taking steps toward changing thebonding requirements for the oil and gas industry. A backgrounder on therationale for the changes that have been made can be found on the TexasRailroad Commission web site. http:/www.rrc.state.tx.us/divisions/og/p5overview.html

In Texas, as of 2002,the state has 17,000orphan wells to plug

at cost of $4,500per well.

The state does notcollect enough

money in bonds tocover the cost of

plugging the wellsif the companies

walk away.

Other Protections Statutes and regulations provide other stipulations that may serve to protect a surface owner’sinterests. Below are just a few examples of other surface owner protection provisions. Again, tofind out what other provisions might be available in your state, consult with individuals, organ-izations or attorney’s who are familiar with your state’s laws.

Filing Grievances and ComplaintsThere are a few options for surface owners who believe their surface rights have been ignored.If a specific law has been broken (e.g., a company fails to notify you of their drilling activities,even though there is a law that requires them to do so), the surface owner may file a complaintwith the appropriate government agency.

It is not always clear which state agency deals with complaints. A good place to start is with thestate’s Oil and Gas Commission (if the state has one). Also, consult the list in Chapter V for someof the state agencies involved in oil and gas regulation. If you don’t have the right agency or depart-ment, a staff person with one of the agencies should be able to direct you to the proper official.

• In Colorado, complaints may be filed with the Colorado Oil and Gas ConservationCommission (COGCC). They have a toll-free complaint line: 1-888-235-1101. If the COGCCenforcement process does not adequately address a surface owner or tenant complaint, anapplication can be filed for a Commission hearing.

• In the case of Montana, the Board of Oil and Gas and the Department of EnvironmentalQuality are the state agencies responsible for permitting, defining reclamation terms, andenforcement in the case of non-compliance. These agencies should be contacted whencompanies are not living up to their responsibilities.

• The U.S. Bureau of Land Management and U.S. Environmental Projection Agency are thefederal agencies most involved with oil and gas regulations and enforcement for federalminerals.

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OWNER PROTECTIONS

FIGURE II-9. PROVISIONS THAT PROVIDE ADDITIONAL PROTECTIONS421

If a surface owner believes that his or her complaint has not been adequately dealt with by thegovernment agency, or if there has been negligence on the part of the government agency thathas led to damage of the surface owner’s property (e.g., failure of the agency to enforce laws),the surface owner has the option of filing a lawsuit against the agency and/or company. Or thesurface owner can attempt to initiate a dispute resolution process, to settle out of court.

Dispute ResolutionMany states have a procedure in place to allow a hearing of a dispute before a public commis-sion (usually the Oil and Gas Commission). These commissions generally attempt to resolve dis-putes in meetings that are open to the public. If parties go through the state dispute resolutionprocess and are dissatisfied with the outcome, they may still use the court system to settle adispute.422

COUNTY AND MUNICIPAL REGULATIONS

If a private party or parties own the minerals beneath your land, and your property is within cityor county limits, then the oil and gas companies must adhere to both state laws and any coun-ty or municipal ordinances or regulations that apply to oil and gas. In many instances, themunicipal and county regulations are more stringent than those of the federal or state govern-ments; and quite possibly, they address different aspects of the development than the stateand federal regulations. Consequently, it is worth spending the time to contact the county andmunicipality to obtain copies of these regulations, as they may offer the most protection tolandowners.

Under federal and Ohio state laws, permission from surface owners is not required in order todrill an oil or gas well. In the City of Norton, Ohio, however, there is a city ordinance that statesthat, “No permit may be issued until 51% of the owners of the real estate units within 1,000feet of the wellhead approve (in writing) the drilling of the oil or gas well.”424

Other requirements in Norton that favor the surface owner include:

• when permit applications are submitted, the City Council holds a public hearing beforegranting a drilling authorization; and all property owners and residents within 1,000 feet ofthe wellhead are notified of the hearing.

• the company has liability insurance of not less than $500,000 for property damage, andnot less than $1,000,000 for personal injury before a permit to drill is issued.425

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FIGURE II-10. COMPARISON OF COLORADO STATE AND COUNTY REGULATIONS423

• all pumps be operated using explosion proof, electric motors

• all fresh water wells within 1,000 feet of the wellhead are tested by the company

Another example of a protective municipal ordinance comes from the City of Lovington, NewMexico. In December of 2003, the city adopted an ordinance to protect the city’s water fromcontamination due to leaks and spills resulting from oil and gas activities in their water field.According to an article in a Hobbs, New Mexico newspaper, “After becoming frustrated with the[New Mexico] Oil Conservation Division’s slow response time to oil spills near the city’s watersupply, city manager Pat Wise and the commission felt it was necessary to draft its own regu-lations.”426

The ordinance contains a number of very stringent requirements for oil and gas companies thatwant to operate on lands within the city’s water field. Examples include:

• The use of closed-loop drilling systems, which prevents on-site storage and disposal ofoften toxic drilling fluids. Companies in Lovington are required to remove from the site,and properly dispose of, all drill cuttings and fluids. This is much more strict than NewMexico state law, which allows for storage and burial of drilling fluids on-site, in unlinedpits. (For more information on closed-loop drilling systems, see Chapter I, AlternativesUsed During the Drilling Phase.)

• A ban on the drilling of new disposal wells, and a ban on the conversion of existing wellsinto disposal wells.

• Leaks or spills must be reported to the city engineer within 15 days.

• The submission of a leakage survey at least once a year. Failure to file the survey with thecity engineer within a specific timeframe results in penalties up to $500 per day for everyday that the report remains unfiled.

• Before drilling begins, companies must receive a permit from the city.

For more examples of local ordinances, see Chapter III.

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OWNER PROTECTIONS

Protections for Surface OwnersWho Also Own the Minerals

If you own the minerals and lease them to an oil or gas company, that company will be subjectto state laws, as well as county and municipal laws (if the land is within county or city limits).Also, the company will be required to honor any contractual agreements made with you, themineral owner. The most common of these agreements is a mineral lease. If you own the min-eral and the surface rights, the mineral lease can be negotiated to protect your surface. SeeChapter III for more information on leasing.

FEDERAL REGULATIONS

The federal government owns more than 30% of the subsurface of the United States , which isapproximately 700 million acres of mineral rights.427 In 2001, approximately 57 million acres offederally-owned minerals were located beneath privately owned land.428 The majority of feder-al split estate lands are located in the western states — in the eastern states only 300,000acres of land are split between federal ownership of mineralsand private ownership of the above-lying lands.429

Between 35 and 40 million acres of federal land (onshore) inthe U.S. are currently under lease for oil and gas develop-ment. When the minerals are federally owned, the federalgovernment retains the right to lease the mineral rights to anoil and gas developer.430

If a company leases the oil and gas from the federal govern-ment, the company (known as the mineral lessee or operator)usually must adhere to both federal and state laws that gov-ern oil and gas development.431 The federal Bureau of LandManagement is responsible for permitting, bonding, and over-seeing the reclamation of federally leased mineral rights.432

The following paragraphs provide information on some of theresponsibilities of the companies that lease federal mineralswhere the land above the minerals is privately owned.

ExplorationThe mineral operator may enter land to explore for oil and gas by filing a notice of intention withthe BLM. A copy of this MUST be provided to the surface owner, but surface owner permissionis not required prior to entry. The exploration period begins 30 days after the notice of intentionis submitted, and lasts for 60 days. During exploration, the “entry” onto the surface owner’sland does not allow for use of mechanized equipment, explosives, the construction of roads,drill pads, or the use of toxic and hazardous materials, and may not cause more than “a mini-mal disturbance of surface resources.”433

DrillingAccessMineral lessees (i.e., oil and gas operators) are supposed to make access arrangements withsurface owners prior to entering a surface owner’s land for the purpose of surveying and stak-ing; but they do not need approval from the federal government to conduct these operations.434

Commenting on Applications for Permits to DrillBefore mineral operators can begin an oil or gas operation, they must submit an application forpermit to drill (APD). Upon initiation of the APD process, the authorized officer of BLM must con-sult with other federal agencies and with other appropriate interested parties. There is a 30-daywindow of opportunity for surface owners to comment before the BLM takes its next steps:

1. approves the application;

2. returns the application, with an explanation as to why it was not approved; or

3. notifies and explains to the operator why a decision on the application will be delayed.

On-site Visits and InspectionsThe BLM is required to conduct an on-site inspection of the proposed drilling operation within15 days of the submission of either the Notice of Staking or APD. The BLM must invite the sur-

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FIGURE II-9. THE HD MOUNTAINS,NEAR BAYFIELD, COLORADO The federal government has leased oiland gas rights in this old-growth road-less area and many other importantwilderness and cultural areas acrossthe country.

Many surface ownersare unaware that

federal minerals havebeen leased under

their land, since thereis no requirement to

notify surface ownersthat federal lands

have or are going tobe leased.

face owner to participate in this on-site visit (along with the mineral lessee), and the BLM is sup-posed to make an effort to schedule a time that is convenient to all parties.435 During the on-site visit, the BLM officers will develop surface use and reclamation stipulations, which will begiven to the mineral operator to incorporate into their APD. The surface owner may request thatspecific items be made part of the Surface Use Program (SUP), which is part of the APD.436 Thisprogram contains information such as: descriptions of road and drill pad locations; methods tobe used for containment and disposal of waste material; and descriptions of measures that willbe taken to reclaim disturbed lands.437 It is up to the authorized federal official whether or notthe surface owner’s suggestions are incorporated into the SUP.

Surface Owner Agreements and BondsBefore entering a surface owner’s property to drill a well, a mineral operator is required to enterinto good-faith negotiations with the private surface owner to reach an agreement for the pro-tection of surface resources and reclamation of disturbed areas, or compensate the surfaceowner for loss of crops and damages to tangible improvements.438 Note that crops only includethose used for feeding domestic animals, e.g., grasses, hay and corn, and NOT plants unrelat-ed to stock raising. Also, tangible improvements include those relating to domestic, agricultur-al and stock raising uses, e.g., barns, fences, ponds or other works to improve water utilization,but NOT nonagricultural improvements.439

As proof of these good faith negotiations, the mineral owner is supposed to secure one of thefollowing: a surface owner agreement for access to enter the leased lands; a waiver from thelandowner for access to the leased lands; or an agreement regarding compensation to the sur-face owner for damages for crop losses and tangible improvements.440

In reality, the company does not have to negotiate in good faith with the landowner, because ifan agreement cannot be reached, the company may simply post a bond to “indemnify the sur-face owner against the reasonable and foreseeable damages for loss of crops and tangibleimprovements caused by the proposed operation.”441 The bond must be at least $1,000, whichis supposed to cover damages to crops and improvements, as well as any loss of income fromusing the land. It is highly questionable as to whether this amount will cover the costs neces-sary to compensate for damages to crops or tangible improvements, especially since drilling awell can disturb anywhere from one to forty acres of land.442 This bond is some-times referred to as the 3814 bond, because it is a requirement under BLMdepartment regulations at 43 Code of Federal Regulations 3814. The bond isnot intended to cover the costs associated with compliance with lease terms,plugging the well, abandonment, or reclamation. Plugging, abandonment andreclamation are supposed to be covered by a 3104 bond, which is discussedbelow.

The BLM is required to send surface owners a copy of the 3814 bond propos-al submitted by the company. The Northern Plains Resource Council has somesuggestions on what to do if you receive a bond notice:443

• Carefully review the bond amount. If it is inadequate, challenge it by filingan objection (discussed below)

• Based on calculations that you have made for replacement costs for your crops, your graz-ing land, your water and any improvements you may have made, develop what you wouldconsider an appropriate bond amount.

• The BLM officer is required to consider these factors, so push hard to make sure they areaccounted for in the bond amount.

Surface owners have the opportunity to object to the 3814 bond amount.444 There is a 30-dayperiod of time during which the landowner may file an objection with the federal office that

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OWNER PROTECTIONS

Companies can posta state-wide bond of$25,000 for all thecompany’s wells onfederal leases withina single state, and ablanket bond of$150,000 for allwells across thecountry.

issued the bond approval. The protest period begins when the surface owner receives a copy ofthe bond, which should be sent by certified mail. The bond will not be approved or accepted bythe BLM during the protest period. If objections are received during the 30-day period theauthorized officer will consider the objections and will determine whether or not the bondamount is sufficient. If it is determined to be sufficient, the surface owner will be sent anothercertified notice explaining that the objections have been overturned, and that the surfaceowner can appeal the decision. The surface owner may then file an appeal with the state officethat issued the decision. Oil and gas operations may proceed during the appeal process.

Reclamation and Abandonment: the 3104 BondCompanies are supposed to reclaim the land to pre-development conditions. To provide someinsurance that sites will be reclaimed, companies leasing minerals from the federal governmentmust also post a 3104 bond for reclamation and abandonment (in addition to the 3814 bondmentioned above).

The 3104 bond must be provided by the operator prior to the APD approval. The bond is sup-posed to ensure that the company complies with the federal requirements to plug wells, reclaimthe leased area, and restore any of the lands and surfaces affected by the drilling operations.

The minimum bond amount is $10,000 per lease, nnoott per well. BLM officials have the power toset the bond amount much higher than $10,000, if a case can be made that the reclamationcosts will exceed the minimum bond amount. Surface owners should be aware that reclama-tion of a single well can easily exceed the $10,000 minimum (which is supposed to cover allwells drilled under one federal lease).

• A recent study by the BLM revealed that orphaned wells in the western states will cost anaverage of $19,000 per well to reclaim, with some sites costing $75,000.445

• Another BLM web site reported that, “As the U.S. oil and gas industry continues to declineand as producing oil and gas fields end their production cycle, many small operators facebankruptcy. Although these operators are required to be bonded, the bonds are insuffi-cient to plug and reclaim the well sites.”446

Another thing to know is that companies can post a state-wide bond of $25,000, for all of thatcompany’s wells on federal leases within a single state, and a blanket bond of $150,000 forall wells across the country.447 It is not unusual for companies to own hundreds of wells, and inthese situations, if a company were to declare bankruptcy there is no way that the federal gov-ernment would be holding enough money to pay for the plugging and reclamation of the wells.

Special Situation: If You Lease Land from the Federal GovernmentIf you do not own but are leasing land from the federal government (e.g., for grazing), there isthe possibility that oil and gas development may interfere with your use of the land, since mostfederal lands are open to oil and gas leasing and development. In 2003, the Department ofInterior released a report stating that 85% of natural gas on federal lands is accessible andopen for oil and gas leasing and development.448

As mentioned above, there is no requirement for federal agencies to notify surface owners thatfederal lands have or are going to be leased. This also applies to those who lease federal landsthat lie above federal minerals. Consequently, citizens who lease federal lands may want to stayin close contact with federal agencies to find out if the minerals beneath the land have beenleased or have the possibility of being leased.

For one landowner’s experience with the leasing of federal minerals, see the story “Rancher NotInformed about Mineral Leasing” in Chapter IV. And for a list of additional resources on oil andgas development on public lands, see Chapter V.

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Documents

Chapter II...2. Educate yourself. Understand your rights, and your options. You may want to consult an attorney. 3. Find allies. You may need support, and be able to learn from others’